Officials at the Federal Reserve wrestled with starkly different scenarios for the US economy after the war between the US and Iran, as well as the policy reactions that may follow, during their March meeting.
Minutes of the Federal Open Market Committee’s 17-18 March meeting, released Wednesday in Washington, showed policymakers broadly backed a wait-and-see approach as they held rates steady, while expressing acute uncertainty over the war in Iran.
The came around three weeks after the US and Israel struck Iran, which was followed by an intense conflict in the Middle East that only got some relief recently as Washington and Tehran announced a temporary ceasefire.
To raise, or not to raise
The minutes released on Wednesday confirmed that the was confident of holding rates steady in the foreseeable future, with policymakers remaining acutely attuned to the risk that a prolonged crisis may increase pricing pressures. If this sustains, it could affect underlying measures of inflation.
Most officials worried that the US-Iran war could hurt the US labour market and demand lower interest rates. At the same time, many policymakers said that the risk of rising inflation may ultimately force the Fed to raise rates.
“Partly as a result of these factors, the vast majority of participants noted that progress toward the Committee’s 2% objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee’s objective had increased,” the minutes said.
Officials who expressed greater concern about inflation urged their colleagues to consider adding language to their post-meeting statement that raised the possibility of hiking rates under certain conditions.
“Some participants judged that there was a strong case for a two-sided description of the committee’s future interest-rate decisions in the post-meeting statement, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels,” the minutes said.
The March minutes reflect a larger group open to potential hikes than at the January meeting, when only “several” officials were willing to open the door to tighter monetary policy.
Seven of the 19 Fed officials pencilled in a 25-basis-point rate cut by the end of 2026, while five of them even rallied behind a possible 50-bps cut. The remaining seven policymakers projected no change.
“Should the higher energy prices persist, higher input costs would be more likely to pass through to core inflation,” the minutes said.
“Some participants highlighted the possibility that after several years of above-target inflation, longer-term inflation expectations could become more sensitive to energy price increases….Participants noted that progress toward the Committee’s 2% objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee’s objective had increased,” they added.
At the meeting, the Fed signalled it was unlikely to change its policy rate until it was clearer whether the impact on inflation or the job market seemed to be the greater risk, holding rates at 3.5% to 3.75%.